The Rosenbaum Law Firm P.C. Blog

Will be teaching my free course on retirement plans for New York attorneys on April 6, 2011 in Melville. Sponsored by Esquire Bank and Janney Montgomery Scott. The details on when, where, and how to RSVP can be found here. Space is limited.

A few years back when I joined a semi-prestigious Long Island law firm, I had this silly notion that I could develop a single employer ERISA practice. Based on my contacts and with my ability to breakdown difficult topics in ERISA into English for advisors, accountants, and plan sponsors to understand, I thought I could do it. That and an ability to write, I thought it was a no brainer that I could bring in some business. One of the major components of developing this practice was try to cross-sell, selling my services as an ERISA attorney to the law firm’s existing clientele, which comprised of many Long Island companies. It was a can’t miss proposition

Well like great ideas like Crystal Pepsi and the Apple Newton, it missed. One of the bigger flops was trying to develop that cross selling. The partner in charge of the corporate department was a very unfriendly fellow who I affectionately now call Mr. Personality. Whether it was Mr. Personality or the three partners in his department, I felt there was a no understanding of what I was trying to do with the ERISA practice. My biggest belief is that my practice can help a plan sponsor cut down on their administrative cost, streamline plan administration, and minimize liability. For a corporate attorney or any attorney that has business clients or individuals who sponsor retirement plan, minimizing liability as a plan sponsor is a big deal. The reason I believe that it’s a big deal is because most plan sponsors are unaware of this potential liability. Those simple mistakes like not developing an investment policy statement (IPS) or reviewing mutual funds on a semi or annual basis are hidden liability pitfalls.  For example before I helped cleaned our plan up, we had no financial advisor, no IPS, no review of funds in 10 years, and no participant education. Perhaps for me, that should have been a clue.

In the 2 years and change I was at the firm and constant talks with the corporate partners, there was absolutely no traction or cross selling on my end. Mr. Personality did refer one matter to me. It was a review of a client’s new prototype plan document with a bundled provider. I reviewed the document and then I contacted Mr. Personality that the with the client’s plan topping at $4 million, it may be a good idea to moving that plan to an unbundled provider to save on administrative expenses, which could help minimize the client’s potential liability. 2 years later, I’m still waiting to hear back from Mr. Personality.

While plan sponsors, financial advisors, and accountants should know about the potential pitfalls of plan sponsor liability, I am amazed that many attorneys show little interest in their client’s retirement plans. It’s not malpractice on their part if they have not been retained in conjunction with their plans, but it’s a sign of neglect. Non-ERISA attorneys don’t have to be ERISA experts, but I think they should be aware of what retirement plans that their clients have and if there are any potential problems with them. They should always ask their clients whether their plan has undergone a review of their practices and plan documents to ensure that there are any lurking liability issues.

With my distaste of my old law firm’s corporate department (they had a knack for turning down business) and my hope to educate other attorneys about the hidden pitfalls of plan retirement sponsorship, I have been certified as a sponsor of continuing legal education course in New York and have an on-line course available in other states.  Educating other attorneys will ensure that there are less corporate attorneys like Mr. Personality who have no care that their client’s retirement plan could be an unmitigated disaster and huge liability pitfall.

The latest edition of my newsletter can be found here.

My latest article on JDSupra can be found here.

My comments regarding Target Date Funds can be found here.

As a kid growing up in the late 1970’s and the 1980’s, I remember that almost every TV Guide and many magazines had an insert for one of the two major record clubs. Prior to digital downloading, buying through a record club for records, tapes, and eventually CDs might be a good deal if you consistently bought albums. One of the things that I always remember is how onerous the shipping and handling charges were and I was always sure was that is how they made their money, by inflating those charges.

With the implementation of fee disclosure, third party administration (TPA) firms and other plan providers will have to fully disclose their fees. For the few TPAs that pocketed revenue sharing fees instead of using it to offset administrative fees, fee disclosure is a problem. Since they will lose that hidden stream of revenue, these type of TPAs will have to discover another source of revenue to support their deceptive practices.

Two TPAs have found an ingenious way of replacing that lost source of revenue. They are now starting to charge a custodial fee or a daily platform custodial maintenance of about 25 basis points. The problem? Most daily no-transaction fee unbundled 401(k) platform such as Schwab, Fidelity, and Matrix typically only charge 5-10 basis points to custody a 401(k) plan’s assets. So by padding the custody fee 15-20 basis points, the TPA can recover some of the revenue lost by disclosing revenue sharing. Let’s face it, the only way a client would find out is by shopping that plan to other unbundled providers.

Pretty sneaky, sis. But like with three card monty, most 401(k) plan sponsors will discover the scam. The sad part is that this scam will be legal, as long as the custody fee is fully disclosed. Don’t be had by a chad or by an inflated 401(k) daily platform custody fee. If you are paying more than 10 basis points for a custody fee, I’d watch out.

My father and aunt grew up in Israel after its independence in 1948 and they both lived there for about a dozen or so years.  My aunt vividly describes her experience in much more fonder terms than my father does. My father notes that in early Israel, there was food rationing and times were tough. My aunt talks about it differently and glosses over the hardship because that time was the time of her youth. We often look fondly on the past and gloss over the tough times because it was a time when we were young.

To be honest, while I grew up on Intellivision, I would rather have had a Wii in those days.

While recent stories and critics have pointed out the shortcomings of 401(k) plans, an interesting article by my friend Chris Carosa in Fiduciary News asks whether it’s time to bring back pension plans. While styles do come back and bellbottoms did, ruffled shirts from the 1970’s and defined benefit plans will not. Thanks to financial concerns and regulatory burdens, employers will not be shifting funding retirement from the employee to the employer.

While defined benefit plans are celebrated with much lore, they weren’t great benefits for those employees who didn’t have them. For those that did have them, they had 10-20 year vesting schedules (prior to TRA 1986) and pensions may be partially lost if the PBGC had to take over the Plan and fully lost prior to the enactment of ERISA (ask the folks at Studebaker).

 Defined benefit plans were staples of larger companies, unionized industries, and governmental workers. Small businesses, the staple of this country’s economy did not have access to low cost retirement plans because the plans in place at that time were employer contributory and therefore likely cost prohibitive. Thanks to 401(k) plans, simplified employee pension plans, and SIMPLE plans, many small businesses now have access to low cost retirement savings plans that they couldn’t sponsor 35 years ago.

So while defined benefit plans are terrific benefits, I think more employers have greater access to offering retirement plans. If you have data to prove otherwise, I am willing to admit I’m wrong.

I have never been covered by a defined benefit plan and I might never be covered by one and I am fine with that. While it would be nice if all employers would shift back to pension plans, so would world peace. I’m not holding my breath for either.

Too often brokers and financial advisors think about their client’s retirement plan needs and only think about the 401(k) plan. It’s understandable based on their lack of understanding retirement plan basics, but it’s not when there are a vast selection of retirement plan consultants and ERISA attorneys who can help advise the client and the financial advisor.

A 401(k) plan is an attractive savings vehicle for plan participants and if done correctly, a great employee benefit. However, there are a few plan designs such as new comparability and safe harbor design that can help augment the retirement savings of highly compensated employees. In addition, there are other plans that can be added to a 401(k) plan that can certainly add a lot more firepower to retirement savings like a cash balance plan, a defined benefit plan, or in many cases, a non-qualified deferred compensation plan.

Too often, plan advisors just don’t look beyond the 401(k) plan. This is more so when the advisor is using a bundled or payroll provider as the plan’s third party administration (TPA) firm.  Bundled or payroll provider TPA tend to be more mechanized about retirement plans, so I find they are the last ones who will try new plan designs or bring the option of adding another plan. Unbundled TPAs tend not be boxed into the 401(k) plans, so I find that they think outside of the box more often.

Last week, I met a financial advisor with a law firm client asking whether they could do better than the typical insurance based platform 401(k). Based on the law firm’s demographics, a cash balance plan could be a great option and this broker would never have thought about anything other than a 401(k) plan if he hadn’t talked to me. Based on the way he acted with how much more money I told him the partners could save for retirement, you thought I found a hidden treasure. Needless to say, I made a new friend.

401(k) plans are great plans if done correctly, but there is no reason that a plan sponsor should stop there if their pocketbooks can afford more.

My latest article on JDSupra can be found here.

There was an article in the Wall Street Journal a few days back and it’s about how Baby Boomers are starting to realize that 401(k) plans fall short.

Too much is blamed on 401(k) plans. At their very worst, they have high fees, poor education given to participants, and mediocre funds. Even at its worst, it is still an effective tax deferral savings program for retirement.

While I have been critical about high fees, poor participant education, and mediocre investments, I still think it is one of the greatest developments in tax law in the last 30 years.  Where else can an employee stock away $16,500 a year on a tax deferred basis (with an additional $5,500 for those 50 are over)? With the addition of the Roth feature, the employee has the option to defer on an after tax basis and have tax free distributions after age 59 ½.

We have a retirement crisis in this country, but is that really the fault of 401(k) plans? Social Security may go broke as soon as it’s my turn to collect, but is it really an effective retirement savings vehicle. Defined benefit plans have gone the way of bellbottoms, but is that the fault of 401(k) plans? Defined benefit plans have been killed by the Internal Revenue Code and over regulation that have either made it easier for plans to curtail them or more difficult to maintain. Either way, it wasn’t the fault of 401(k) plans.

As far as saving in 401(k) plans go, they are like studying for the bar exam. Having taken and passed three different state bar exams (NY, MA, and CA), I can tell you that I studied hard for weeks at a time. I didn’t pick up the book the day before the exam and expect to pass. Passing the exam takes weeks of consistent, daily studying. As far as saving in 401(k) plans, they need consistent savings. Saving in a 401(k) plan isn’t for those who just turned 50. Just saving when you are near retirement is the ultimate financial error.

 When I was 27, I was finally a participant in a 401(k) plan and I started to save as much as I could (those days there were deductibility limits that limited what I could defer pre-2002). My mother, not a financial wizard, didn’t understand why I was saving for retirement, that it was for when I was older. As ridiculous as my mother’s advice was, I am sure that too many Americans don’t understand that saving for retirement has to take place over a 30-40 year period.

We can talk about all the problems that 401(k) plans, but I have yet to find anyone who complains about them come up with a better alternative. A government sponsored plan isn’t the idea, look what they have done with Social Security. I think fee transparency and plan designs like automatic enrollment or perhaps mandated automatic eligibility for the salary deferral portion of a 401(k) plan can enhance the retirement savings of countless Americans.

At the end of the day, with all the problems that 401(k) may have, it’s up to the individual to save for retirement. Let us stop blaming plan providers or mutual fund companies, let us take some personal responsibility first.